One in six insolvencies could be avoided if the warning signs are spotted sooner, says Michelle Rodger

Published on Saturday 23 May 2009 14:12

A LACK of financial forecasting is being blamed for the demise of 880 small businesses that failed in the last quarter of last year. And there will undoubtedly be more. But one in six insolvencies could be avoided if entrepreneurs had better financial control over their business.

Turnaround experts are claiming that businesses can be saved if entrepreneurs spot the warning signs early enough and act on them; identifying potential issues quickly can mean the difference between a turnaround, restructuring or insolvency. In short, the old adage "a stitch in time" could save an entrepreneur's dream from unravelling.

If a business is in financial strife, there's a brief window of opportunity in which to start the turnaround process. A period of 33 weeks is all you have to discover whether turnaround initiatives could work.

The challenge is in spotting the warning signs early enough to make a difference, but according to business advisers the Tenon Group, one in six small businesses that fail could have continued trading if they had the systems in place to highlight forthcoming financial perils.

Tom MacLennan has worked through four recessions in his career, but this is the toughest by a long way. For him, the biggest issue right now is that a lot of entrepreneurs don't actually have financial control of their business; they don't understand their financial position and miss the early warning signs that they are in trouble.

The tendency to make like an ostrich is common. But debt denial is compounded by the fact that approximately one in eight businesses fails to carry out any financial forecasting, and one in three only carry out forecasting once a year.

Tenon director MacLennan says you should look hard at your cost base, your people and your overheads.

Initially you would believe there is a high level of indispensable costs, but you can always cut costs deeper than you think the first time you look at them, and again the second and the third time.

Ideally, you should know the costs of wages and overheads on a weekly basis; you should know what sales you are making and the margin on those sales; and you need to be continually forecasting your cash and managing the cash flow – in simple terms you need to know what is going out and how much cash you have to collect.

It sounds easy, but MacLennan says it's a very emotive process and entrepreneurs and business owners tend to hold on for longer than is necessary.

He speaks from painful experience. In the early 90s he was a partner in a business that survived the recession, but in October 1993 he had to cut around 10 per cent of the workforce. "Should we have done it earlier?" MacLennan says. "Yes. Did it cost us? Yes. We carried 15 to 20 people for six to nine months longer than we should have. And the world is a much less forgiving place now than it was 16 years ago."

So what do you do? Plonk your head firmly in the sand and determine to stay there until the worst is over? Unfortunately, by the time you come up for air, there may be nothing left for you to fix.

Seek advice, but don't sit back and wait for the cavalry to arrive. In addition to tight cost controls there are a number of actions you can take to kick-start the turnaround process yourself.

The first is to keep on selling. Keep in touch with your customers and ask for their feedback, listen to what's happening in their space and try to find a way of supporting them by improving your service delivery or coming up with a new solution that you can sell them.

And make sure they pay on time. Invoice promptly, collect firmly, credit check all new customers and where necessary, negotiate new credit terms.

Establish key business indicators, then monitor performance religiously. Get creative, set up a recession-busting group to look at opportunities and tackle the challenges. The people who work for you are usually customer facing and often better placed to see and hear what you don't when you're stuck behind a desk.

You need to review and revise your preferred suppliers to get the best deals. And spread the risk; don't place too much reliance on one customer or supplier.

But the golden rule is to seek help as early as possible. The biggest frustration for insolvency practitioners is saying: "If you'd called me six months ago we might have been able to do something".

John Hall, of R3, the Association of Business Recovery Professionals, is also involved in the angel network in Scotland, and is seeing a huge demand from SMEs for advice on how to survive the recession. The demand for turnaround services and general advice is huge, he says, as most managers in SMEs just haven't been in this situation before.

According to Hall, insolvency practitioners have a nasty perception as angels of death, hauled in by the banks when it's all but over. "We're not undertakers – we are skilled at building a workable solution for businesses in trouble. If an SME is in the mire they need immediate support. It's not about blue sky thinking and how to increase market share over the next six months. They need to know how to get through the next six days."